Q3 2025 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation Third Quarter Earnings Release Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will invite you to participate in a question and answer session.

At the close of prepared remarks, we will open the queue for the Q and A session. As a reminder, this conference is being recorded Wednesday, November 19, 2025. I would now like to turn the conference over to Mr. John Holbert, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on our third quarter 2025 earnings conference call. On the line with me today are Brian Cornell, Chair and Chief Executive Officer; Michael Fiddelke;, Chief operating Officer; Rick Gomez, Chief Commercial Officer; and Jim Lee, Chief Financial Officer. In a few minutes, Brian, Michael, Rick and Jim will provide their insights on our third quarter performance and outlook for the rest of the year. Following their remarks, we'll open the phone lines for a question-and-answer session.

This morning, we're joined on this conference call by investors and others who are listening to our comments via webcast. Following the call, Jim and I will be available to answer your follow-up questions. And finally, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, including those described in this morning's earnings press release and in our most recently filed 10-K. Also in these remarks, we refer to non-GAAP financial measures, including adjusted earnings per share.

Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number are included in this morning's press release, which is posted on our Investor Relations website. With that, I'll turn it over to Brian to kick things off. Brian?

Thanks, John, and good morning, everyone. This is my final earnings call as Target's CEO, and I plan to keep my comments brief this morning. but I wanted to take a moment to thank all of you for your ongoing engagement and support over the last 11 years. It's been the highlight of my career to lead this great company and our business has undergone many important changes since I arrived in 2014. We entered into an innovative partnership with CVS to run our pharmacy business. We changed our operating model in food and beverage, paving the way for explosive growth in that part of the business.

We invested in our product design, development and sourcing capabilities and launched several new billion dollar owned brands. We pioneered the Stores & Subs model for digital fulfillment, remodeled well over 1,000 of our existing stores and added nearly 200 net new locations in the U.S. All told, this year's top line is expected to be well over $30 billion higher than the year I arrived. In that 2014 fiscal year, GAAP and adjusted EPS both came in around $4 a share.

And the upper end of this year's expected range for adjusted EPS is double that number. I am proud that our team could deliver this top and bottom line growth while building a solid foundation of operating capabilities, including one of the nation's largest [indiscernible] programs and Target Circle and a rapidly growing retail media business in Randell. That said, our business has not been performing up to its potential over the last few years. And I am singularly focused on supporting Michael and the entire leadership team as they make changes to the way we work, enhancing our merchandising authority, our retail experience and investing in technology to accelerate our business.

In the call today, you'll hear how the team is working quickly to get the company back to profitable growth. And while we're not there, yes, I'm confident we're on the right path and Michael is the right person to lead the next chapter of Target's growth. So with that, I want to thank all of you for your participation today and for your thoughtful engagement over the years. And finally, I want to thank the entire Target team.

It has been a privilege to work with you in support of this great brand. Now I'll turn the call and today's Q&A over to Michael.

Thanks, Brian, and good morning, everyone. We have high but achievable aspirations for Target's future, and we're acting with urgency to make the changes and investments to position Target for sustainable and profitable growth over time. While our third quarter performance came in as expected, we're far from satisfied with our current results, and we won't be satisfied until we're operating at our full potential. To get there, we've set 3 distinct but highly interrelated priorities for our team.

First, we must solidify our design-led merchandising authority leading with incredible product in a way that is distinctly target. Second, as a retailer that believes that the shopping experience is every bit as important as the products we sell, we need to offer a more consistently elevated experience across our stores and digital platforms. And third, we need to more fully use technology to improve our speed, guest experience and efficiency throughout the business. Together, these priorities are in service of one goal, getting back to sustainable growth as quickly as possible.

They guide every decision we make, and I want to spend a few minutes to help clarify what these priorities are, why each matters and share some of our progress to date. Before I expand on these priorities, I want to pause and acknowledge our recent restructuring headquarters, in which we eliminated approximately 1,800 roles or about 8% of our headquarters footprint, a difficult but necessary step forward. While Jim will walk through some financial aspects of this decision, I want to make it clear that this move wasn't about cutting costs. Instead, by removing layers that have added complexity to the way we work, we're aiming to work with greater agility making it clear [indiscernible] decisions and empowering our team to operate with greater authority and speed in support of our strategy.

So let's discuss how we're making progress in solidifying our merchandising authority and elevating our shopping experience. And you'll also see the critical role that enhanced technology is playing in support of both, helping us progress quickly, efficiently in industry-leading ways. We are a design-led company. And that starts with our authority and merchandising.

Our ability to build a unique assortment of the right, stylish on-trend products at incredible value that's so central to who we are and key to our differentiation and future growth. At Target, we believe that offering an assortment that's distinctly ours is essential to maintaining our merchandising authority with our guests. Not every category plays the same role towards these efforts, but together, they create an assortment and experience that feels unmistakably target. A great example is the transformation of our hardlines business into FUN 101 an evolution in bringing greater cultural relevance, style authority and trend-right energy to the assortment, reinforcing what makes shopping at Target so special.

And while we have much more change in FUN 101 to come, it builds our confidence to see the categories that have seen the greatest change driving some of the strong sales performance already. Rick will have more details to share later. And within each category, merchandising authority means staying incredibly close to our guests by knowing what they want next, reacting to, predicting and even setting new trends and tech will play a critical role in helping us get there. We're enhancing our capabilities by equipping our teams with new tools that provide them with AI-enabled consumer insights at their fingertips.

Our merchants now have real-time access to advanced data from what is currently trending on social media to which products and styles are resonating with consumers at Target and across the industry today, to what future trends our guests are most likely to care about, helping our team forecast needs, anticipate trends and buy both smarter and faster. New tools also include our recently developed target trend brain, our new internal creative platform, which uses Gen AI technology to help our teams identify and react to emerging trends faster and predict future trends. By leveraging AI to capture color, material, style and product details in applying consumer research and our brand principles, we can deliver unique and on-trend products to our guests faster than ever before.

To further enhance our speed to market, we've also created synthetic audiences, AI-driven models that simulate real consumer populations to preview how different groups could respond to campaigns and products before they ever launch. This allows our marketing and design teams to test, learn and refine products, promotions and messaging with incredible speed and efficiency. And while you'll see us continue to accelerate our use of technology, it's our talented team that brings this work to life, and we are investing intentionally in our team and how we approach our work. We're redefining roles throughout the cross-functional team that supports our assortment planning and buying decisions, what we call our merchant roundtable to better equip our teams to make bolder decisions even faster.

I'm also excited to share we welcome new leaders to the team in areas like our home business to bring new ways of thinking and accelerate change in the signature category. These steps forward are examples of how we're solidifying our design-led merchandising authority by using people, process and technology to drive greater levels of newness and differentiation across our entire assortment more quickly reacting to emerging trends and amplifying these trends faster than ever before. Let's turn now to our team's efforts to elevate the guest shopping experience, both in stores and digital, a great guest experience means a lot of things, but it starts with a warm, friendly and helpful team.

In stores, we're making changes to give our team members more time to focus on what matters most, spending time helping our guests. Through enhanced digital tools, we're reducing time devoted to backroom tasks through more efficient truck unloading and stocking. Every hour we save is being reinvested to allow more guest interaction with a focus on friendliness and service that makes target. An elevated shopping experience also means consistently finding the products you want to need every time you shop.

This holiday season, we're using our expertise and deep consumer knowledge in a new gene E-powered gift finder available on our website and our app, allowing guests to ask questions on the app and help them find the perfect gift this holiday season by simply asking something as generic as what is a good present for my mother in law, to something more specific like I have a 5-year-old son that loves Dynasores? What gifts are available for under $20? Our app will provide recommendations or ask clarifying questions to quickly and easily help guests find the right presence for every person on their holiday shopping list.

For guest shopping in our stores and online, we're also investing resources to ensure we have the right product in the right place at the right time all year long. This includes modernizing the technology that forecasts, orders and positions our inventory, using machine learning to optimize flow from supplier to shelf. It's helping us move inventory more efficiently, improve reliability for everyday frequently purchased items and further improve in-stocks. We've coupled these tech enhancements with process improvements some great root cause problem solving by the team and clear measurements that show where we have the most room to improve.

All in, we've seen meaningful progress on this front. In fact, this past quarter, the on-shelf availability of our 5,000 top items, the ones for which being in stock is most important to our guests and which represent 30% of our total unit sales saw a more than 150 basis point improvement compared to this time last year. But even with this meaningful progress, I want to emphasize that we have much more room to improve and we're not slowing down. An elevated store experience also means meeting our guests when, where and how they want to shop.

To do this, we're reconfiguring the role each of our stores plays within a market to optimize fulfillment speed and capabilities and in the process also better supporting the in-store shopping experience. Our pilot in the Chicago market has demonstrated the effectiveness of new operating models that govern each location's mix of in-store and digital fulfillment, helping to improve the guest experience and operational performance at each store at the same time. For those stores with high foot traffic volume, reducing their mix of brown box fulfillment, allowing those teams to spend more time interacting with in-store guests.

For lower volume stores in the same market with big back rooms that are perfectly suited to ship product, we're pushing more digital fulfillment volume their way. And, of course, more labor hours to support this work, creating economies of scale in a more optimized workload for each node within a market. With the changes we've made, we're getting guests the products they want faster than ever while reducing average fulfillment costs. As a reminder, we already reached around 80% of the U.S. population with same-day delivery powered by Target Circle 360, where sales grew more than 35% again this past quarter, and around 99% of the U.S. population is already eligible for 2-day shipping.

And now with our evolving market fulfillment strategy that includes expanding these learnings to an additional 35 markets, more than half of the U.S. is eligible for next-day shipping, and we expect to meaningfully expand that reach in the coming year. Elevating experience also means staying ahead of new ways our guests want to shop. We're leading in the next wave of digital engagement by partnering with the world's biggest Gin AI platforms, through an initiative we call conversational curation. Building on the apps for chat GPT experience previewed in early October, we're curating the shopping experience directly from the guest's own conversation.

Guests tell us what they want or even what they're trying to solve for, and open AI will offer personalized recommendations. Through this partnership, we expect to be one of the first retailers on Open AI platforms to offer the purchase of multiple items in a single transaction, offer fresh food products on the platform, and the ability to choose drive up and pick up fulfillment options in addition to the conventional shipping options offered by others. Finally, I'd like to touch on important investments that will drive both merchandising authority and an elevated experience. Our investments in new stores, store remodels and chain-wide category changes aimed at providing greater inspiration in joy for our guests every time they shop.

Our new larger-format stores are outpacing our initial sales expectations and continue to be a strong source of growth. Given current real estate opportunities, we expect to continue opening these bigger boxes in more and more markets across the U.S. Additionally, we're formulating plans for next year that will bring greater changes to key floor pads throughout the store, which will accelerate both our merchandising authority and our experience. To support this change, we'll be increasing our CapEx plans for next fiscal year, spending about $5 billion, about $1 billion more than this year to bring the latest and greatest of target to new and existing markets.

Rick and Jim will have more to share on this in a moment. So now before I get ready to pass things over to Rick, I want to thank the Target team, you power our progress, and it is together as a team that will write Target's next chapter. While we're not yet where we want to be, we're making change to lay the foundation for a stronger, faster and more innovative target, one that's grounded in our purpose, fueled by our team and focused on growth. I'm proud of the progress we've made and confident in the opportunities ahead.

And to those of you listening this morning, if you leave having heard nothing else, I'd leave you with the following thoughts. We are not satisfied with our current results and are relentless in our pursuit of returning to growth. Our 3 priorities around merchandising, experience and technology have us on the right path. And we know what needs to be done and are actively making progress towards being the best version of ourselves for our guests, our team and our stakeholders.

With that, I'll turn the call over to Rick to share more about our third quarter performance and all we have planned for this holiday season.

Thanks, Michael, and good morning, everyone. Our third quarter results underscore that we still have work to do but they also show us that the actions we're taking are the right ones for our guests and for our business. We're focused on improving performance, particularly in discretionary categories, listening closely to our guests and moving with greater agility to bring them the newness and affordability they expect from Target. In Q3, results were in line with expectations and similar to second quarter performance, with the exception of Q2 benefiting from the Nintendo Switch 2 launch, Q3 comp sales were down 2.7%, reflecting continued softness in discretionary categories like home and apparel, partially offset by growth in food and beverage and FUN 101. Digital comparable sales grew 2.4%, fueled by more than 35% growth in same-day delivery, powered by Target Circle 360 and continued growth in Drive-Up.

We saw the strongest sales around seasonal moments like back to school, back to college and Halloween, highlighting once again the importance of these holidays to our business. Across categories, one theme is clear. Our guests continue to respond to newness and style-forward assortments. FUN 101 delivered another quarter of growth led by a nearly 10% comp in toys and double-digit growth in music, video games and our expanded selection of sporting equipment.

All categories where we've invested in unique to target assortments that are clearly resonating. Food & Beverage also delivered another quarter of comp growth with notable strength in beverages, which were up nearly 7% in Q3 as guests leaned into our trend forward health and wellness assortment from prebiotic sodas to better-for-you energy drinks, we also saw strength in candy categories, particularly as the Halloween holiday approached. While apparel comps were down 5%, we delivered meaningful growth in denim and sleepwear categories, driven by style, forward newness, that helped to offset softness across the portfolio.

This tells us that while there is still plenty of work to do, where we have made our biggest bets in terms of on-trend, design-led newness, consumers are reacting positively giving us confidence in our approach and the path ahead. Turning to the consumer. Many of the themes remain largely consistent with what we shared in prior quarters. Guest ARE choiceful stretching budgets and prioritizing value, they're spending it matters most, especially in food, essentials and beauty, while looking for trend-right deals in discretionary categories.

They want quality and price to coexist, something we do particularly well through our balance of must-have national brands, our exclusive owned brand portfolio and our curation of emerging brands. As part of our work to solidify our merchandising authority, we will continue to elevate our assortment to lead with trend while always considering affordability and value. As we approach the holidays, we know consumers remain cautious Sentiment is at a 3-year low amid concerns about jobs, affordability and tariffs. Yet they remain emotionally motivated.

They want to celebrate with loved ones without overspending. Our job is to help them do just that. Given our focus on affordability, we recently lowered prices on thousands of everyday food and essential items to help families further manage their budgets. And for the next major holiday around the corner, our Thanksgiving meal deal this year is one of our most affordable yet, feeding a family of 4 for less than $20 with Good & Gather Turkey at just $0.79 per pound as well as potatoes, staffing and other seasonal sides for less than $5. And while we are, of course, standing tall for the traditional Thanksgiving Fair, guests are also embracing new food trends like Good & Gather seasonal empanadas, gourmet host gifts from Marks & Spencer, Stonewall Kitchen, Sugarfina, and Hearth and Hand with Magnolia Table and new to target brands like Little Spoon, everyday dose and protein pop.

As a percentage of our total Food & Beverage sales, we are selling twice the volume of new products compared to the industry, a sign that our trend bets are paying off. We're also accelerating newness in women's apparel, leaning into lux fabrics and trending athleisure at affordable prices. Inspired by our sourcing trip to the Swiss Alps, our latest Cashmerlike sweater start at just $30 and deliver the on-trend casual yet chic Opreski look. [indiscernible] at leisure fans, JoyLab is launching new patterns and fabrications in mid-December, earlier than ever this year. Perfect for gifting are those New Year fitness goals.

In holiday decor, we're offering upscale and festive design at unbeatable prices from contemporary collections to nostalgic Christmas Classics, we have styles for every home. Ornaments start at $1, $3 and $5 price points, with holiday throws at $10 in Reeves and Fo greenery at $12, bringing incredible design and quality within reach. And once the tree is trimmed, it's time to think about what goes under it. As I've shared before, trading cards have been a huge trend that we have been leaning into.

And this holiday season, we will be offering new product drops nearly every week, including Pokemon, MAGIC: THE GATHERING, NFL, MLB and WNBA cards. This includes highly anticipated exclusives, already hitting shelves and continuing to be released throughout December as well. This year, we've also expanded our assortment of affordable and on-trend toys, including thousands under $20 with many starting at just $5. As the #1 market share player for LEGO, we are partnering with this iconic brand to offer exclusive to target sets starting at just $10. And for Barbie fans of all ages, we're offering 2 exclusive Barbie collaborations with Joanna Gaines, a collectible doll and her perfectly designed townhouse to live in.

All in, we are introducing 20,000 new items into this year's holiday assortment, twice as many as last year, with over half exclusive to Target. Before turning it over to Jim, I want to share how Michael's new enterprise priorities are taking shape across our commercial organization. In partnership with the Enterprise Acceleration Office, we've been modernizing how our cross-functional teams support all buying decisions at Target, what we refer to as our merchant roundtable. To clarify roles, streamline accountability and empower teams to make bold data-driven decisions allowing us to move faster and infuse newness into assortments more frequently.

But not all newness is created equal. It isn't just about offering new products for the sake of newness. It's about leaning into the emerging trends in culturally relevant moments. When we do, this is when we see the strongest reaction from our guests.

For the perfect example, look no further than our Stranger Things 5 assortment. We have the largest assortment of exclusive products in retail in the U.S. along with throwback marketing campaigns that transport guests back to the 1980s Nostalgia. Plus, we're dropping new items into the assortment every week to align with the new episode releases. This is yet another example of the incredible work we are doing to reimagine our hardlines assortment into FUN 101, a year-round celebration of culture, trend and style, served up in an only target way.

And next year, we're planning to take these learnings and make bold investments to transform the in-store shopping experience and assortment. In fact, we already have plans to introduce more changes to our stores than we have in any year in the past decade. We will have far more details to share at our Financial Community Meeting this spring. With that, I'll turn the call over to Jim to walk through our third quarter financial results and updated expectations for the balance of the year.

Thanks, Rick. Our financial results in Q3 were in line with our expectations as our team continues to focus on what we can control and manage the business with discipline, despite continued softness on the top line, volatility in weekly and monthly trends, and uncertainty in the external environment. Third quarter net sales were 1.5% lower than a year ago, slightly better than our year-to-date performance, but about 60 basis points softer than in Q2. Category sales trends were relatively consistent between Q2 and Q3, with the exception of hardlines, where we saw continued growth but at a slower pace, following an outsized boost from the launch of the Nintendo Switch 2 in the second quarter.

Across our selling channels, comp sales in our stores were down about 4%, while comparable digital sales grew 2.4% on top of nearly 11% a year ago. Within our first-party digital sales, we saw mid-single-digit growth in our same-day services, led by more than 35% growth in same-day delivery. Beyond our first-party digital platform, we saw a significant step up to nearly 50% growth in GMV of our Target Plus marketplace and mid-teens growth in Roundel ad sales, demonstrating the breadth and growing relevance of our digital ecosystem. Top line results during the quarter were quite volatile with net sales close to flat in August and October and down about 4% in September.

This pattern reinforces many of the consumer themes we've been highlighting for some time. as guests shopped around back-to-school and back to college in August and around Halloween in October, but pulled back in September in between those key seasons. In addition, September apparel sales were hampered by unusually warm weather across the country while October benefited from the response to our most recent Target Circle week as consumers continue to focus on value. On the gross margin line, our Q3 rate of 28.2% was about 10 basis points lower than last year. Among the drivers, we saw about 1 percentage point of pressure in merchandising, reflecting the impact of higher markdowns.

This pressure was offset by about 70 basis points of favorability from lower inventory shrink versus last year. In addition, we saw about 20 basis points of favorability from supply chain and digital fulfillment as the benefit of higher productivity and the lapping of last year's supply chain challenges was partially offset by the deleveraging impact of lower sales. Regarding our outlook for inventory shrink. Consistent with our prior commentary, we expect that shrink improvements will account for approximately 80 to 90 basis points of gross margin rate favorability for the full year.

This would bring it fully back down to pre-pandemic levels, marking a dramatic turnaround over the last 2 years. One other note, our Q3 ending inventory was about 2% lower than a year ago. This is in line with recent trends in our Q4 sales outlook and reflects growth in our frequency businesses that was more than offset by lower levels in our discretionary businesses. Moving back to our third quarter P&L.

Our SG&A expense rate of 21.9% was about 60 basis points higher than a year ago. However, this rate reflected about 60 basis points of impact from onetime business transformation costs. Excluding these costs, our third quarter SG&A expense rate was approximately flat to last year. On the bottom line, our business delivered third quarter GAAP EPS of $1.51 compared with $1.85 a year ago.

Adjusted EPS, which excluded business transformation costs was $1.78 in the third quarter, about 4% lower than a year ago. While this is far short of where we aspire to be over time, it is solid profit performance in a quarter where our top line was down more than 1% and reflects stronger relative performance versus the first half of the year, consistent with our prior commentary. I'll turn now to capital deployment and reiterate our priorities, which we've consistently followed for decades. First, we look to fully invest in our business in projects that meet our strategic and financial criteria.

Second, we look to support the dividend and build on our record of more than 50 years of consecutive annual increases. And finally, we look to deploy any excess cash beyond those first 2 uses to repurchase shares over time within the limits of our middle A credit ratings. Regarding our first priority, we've invested about $2.8 billion in capital expenditures so far this year and continue to expect full year CapEx of around $4 billion. Regarding the second priority, we paid $518 million in dividends in Q3, which was $2 million higher than last year as a 1.8% increase in the per share dividend was mostly offset by a lower average share count.

Regarding the last priority, we deployed just over $150 million to repurchase our shares in the third quarter, following a pause in Q2. While we ended the quarter with a healthy cash position and expect to have continued capacity within the limits of our middle A ratings, we'll continue to exercise caution in our repurchase program in the face of continued uncertainty in the external environment. Now I want to turn to our outlook for the fourth quarter and the full year. While our Q3 results were consistent with our expectations, we've continued to see a high degree of volatility in our business.

In addition, we're mindful of the challenges facing consumers as exemplified by recent declines in consumer confidence. As such, while our top line expectations for Q4 are in line with our prior guidance and recent performance, we've narrowed our full year EPS ranges and moved our adjusted EPS range to the bottom half of the prior range. With that as context, on the top line for the fourth quarter, we're continuing to expect a low single-digit decline in our comparable sales. in line with our year-to-date performance. On the adjusted EPS line, our updated range is from $7 to $8 for the full year.

The expected range for GAAP EPS is about $0.70 higher than for adjusted EPS reflecting the benefit of the first quarter litigation settlement, partially offset by business transformation costs. Against the backdrop of a very difficult environment, I am proud of the team's hard work this year to navigate a very high level of complexity including their work to mitigate the impact of tariffs and navigate challenging consumer conditions. Over the past several months, we've also been hard at work to drive prioritization and outline key investments to return Target back to sustainable growth. Looking ahead to next year, we expect to ramp up our capital spending meaningfully in support of our store experience and remodel program, a step-up in technology and digital fulfillment capabilities and investment in new stores.

Our current plan envisions 2026 CapEx dollars increasing by approximately 25% or $1 billion versus 2025. In addition, we are planning to leverage a continuous pipeline of productivity initiatives and approximately $180 million of expected annualized savings from our recent business transformation efforts to invest in key areas in support of our 3 strategic priorities. We will share more details on our plans for 2026 and beyond at our financial community meeting in March. While we know there's much more work to do, I'm confident that we are rapidly moving in the right direction and positioning our business to get back to sustainable, profitable growth in the years ahead.

With that, I'll turn the call back over to Michael.

Thanks, Jim. Before Rick, Jim and I take your questions, I want to emphasize some of what you've heard from us today and to underscore where we're headed as a team. There is no question that this is a period of transformation for Target. The environment around us continues to evolve, whether it's shifting consumer demand, changing competitor dynamics or broader macroeconomic pressures.

But let me be clear, we are not waiting for conditions to improve. We are driving the change ourselves right now. We are taking bold decisive steps to reshape how we work and reignite growth with urgency, focus and confidence in who we are and who we can be. We know what makes Target special, an unmatched merchandising authority and the ability to create joy through an elevated and inspiring guest experience all enabled by the power of technology to amplify both speed and connection across every part of our business.

These are more than ideas on a page. They are the pillars of our strategy, shaping every decision we make, and they are coming to life right now across the company. We're hard at work to simplify how we work to make faster, smarter decisions. We're laser-focused on strengthening our foundation in our supply chain, our stores, our digital experience and our technology capabilities.

We're relentlessly striving toward greater authority in merchandising by combining data-driven insight with a design leadership and creative spark that makes target. And together, these actions are paving the way for what comes next, a return to sustainable profitable growth. While many out there have questions about where we'll go next, we are confident we're on the right path. That's because we're building from a strong foundation, a brand that guests love, a culture that's resilient and a team that's united behind a shared mission to help all families discover the joy of everyday life.

As we look ahead, we're not just talking about getting back to growth. We're talking about building a stronger, more innovative target that's ready to lead in the next era of retail, one that moves faster, connects deeper and stands taller in the hearts and minds of our guests. And to our investors, partners and the financial community, thank you for your continued engagement. And if you're frustrated with our recent performance, we are too, and our entire team is working incredibly hard to return to growth and live up to our full potential.

Finally, in the spirit of thinking and working differently, I'm excited to share that this year's financial community meeting will take place right here in Minneapolis on March 3. It will be a peak behind the curtain to help bring to life what we've talked about today in a more tangible way, providing a first-hand look at how we're evolving our assortment and technology, all in service of returning to growth. We look forward to seeing you all in Minneapolis this spring, and we'll be sending out more information very soon. And now we'll move to Q&A. Rick, Jim and I will be happy to take your questions.

Our first question comes from Simeon Gutman with Morgan Stanley.

And Brian, best of luck. My question, Michael, for you, I think in 2016 or '17, there was a reset of margin during a prior investment phase that helped reposition Target for the next several years. At this stage, I guess can we rule that out, how have you thought about taking maybe a deeper investment in, I guess, margin in order to reinvest? Or should we now assume that -- this is the plan, it goes forward, and there doesn't need to be one?

Yes. Thanks for the question, Simeon. We've got a pretty big Q4 holiday season that we'll get through before we unpack the specifics for next year. But what I can tell you is we're committed to making the right investments to get the outcomes we want when it comes to leading with merchandising authority and elevating the experience.

We also have a lot from which to draw on there. The team is doing a wonderful job of finding efficiency within the business and changing some of how we work to reinvest. I mean, an example of that is some of what we found in elevating the store experience, we've taken a lot from our fulfillment market tests in Chicago. And as a reminder, that's about changing kind of how we organize stores against the work to be done.

We found that making some stores round box shipping specialists because they've got the capacity, they've got the big back room. They might be a little lower volume in general, let them ship that brown box product so that we can free up our busiest in-stores our busiest in-store guest experiences to focus on serving that in-store guests. And so changes like that, we've seen good results in. We're rolling out some of the learnings from that test to 35 more markets here before the year is out.

And that's the type of change we believe can fuel the step-up in experience that we want. And so we're excited about doing the work to get better outcomes when it comes to leading with merchandising authority and elevating the guest experience, and we feel like we're on the right path. The other thing I might add is you heard us describe our capital investments for next year. And that's putting capital to work and direct support to the priorities that we've laid out.

And like we always have, we chase returns. And so the places where we're excited to step up investment are places where we expect really strong returns. That starts with investments in our stores, and those come in a couple of forms. You've heard us talk about the strength of our new store pipeline.

That pipeline continues to be as strong as ever. It's been just a delight to watch the new store openings this year, especially those bigger boxes that continue to outperform our expectations. And there's nothing more fun than walking a brand newly opened store in a market that maybe didn't have a target or didn't have a target close to that neighborhood and to see the response in the community when we open a store. And that response is great on the faces and voices of those guests, and it's also great in terms of the incremental sales it provides and the high returns we see in those new stores.

The second place where you'll see us continue to lean in is in store remodels and refreshing the existing fleet of stores. And while we've been talking about that for several years, we've been hard at work, as Brian even touched on in his opening remarks of remodeling the chain, that work isn't yet finished, and we want to make sure that we're investing in some of the stores that when we bring our latest and greatest store experience we see a reliable strong response from guests. We continue to see strong sales lifts that justify the investment in those remodels. And so for the stores that haven't yet seen a remodel, we think it's imperative that we bring our latest and greatest thinking.

That's a direct investment in the store experience itself back to the strategy. And the merchandising authority because when we do a remodel, we reallocate the space up to our latest and greatest thinking by strategy, and that helps the merchandising drive some of that sales lift. And then importantly, technology will continue to be an area of focus for investment. We know the power of technology to help the humans and the humans that we focus on most there are obviously our guests and our team.

And so wherever we can lean in and use technology. And again, it generates returns when we make things more delightful for our guests and the way technology can help with personalization on the app or help us get product to their doorstep faster and then for our team where we can allow the process-focused work of the team to get a boost from technology that frees up our store teams to better serve guests. And so there's a lot of examples within that CapEx investment. But at its core, or does it directly support the areas of focus within the strategy and do we like the returns.

And then the answer to those 2 questions is yes, you're going to see us invest.

The quick follow-up, and you partially addressed it. I wanted to ask about the gaps and capabilities. You mentioned the different focus is merchandising experience. what are the most urgent gaps and capabilities? And then what are you most excited about, meaning things that can get addressed in the near term?

And the things that I'm most excited about are some of the places where we're seeing momentum already. Take, for example, the work that we're doing in FUN 101. That's a perfect representation of us bringing real focused strategy to the categories that we used to call hard lines to say, what categories are what we do -- are the things that we do uniquely well, best positioned, how do we bring style and culture and design leadership to those categories. And so we've made more change in those categories. And we see response in those categories.

It's good to see categories like toys is running an almost 10% increase in Q3. It's good to see the places where we've applied focus moving in the right direction. I think the same is true on experience. The work we're doing to create a consistently elevated experience, we like the trajectory there. That starts with the basic being in stock as part of a great guest experience, and we're seeing real meaningful progress from the team's incredible work to move the needle in the right direction there.

And while on that front. We're not yet satisfied. We're not yet where we want to be. We like the direction of travel a lot.

And so we'll continue to do the work and apply the focus to get improvement in the direction that we want there. Rick, I don't know if you want to add anything on the product side for some of the places where we've got changed and where we're seeing a strong guest response.

Yes. I mean I can -- well, how about this. I'll talk a little bit about some of the capabilities that were the question addressed about which capabilities do we want to -- are a priority for us to evolve? And I want to highlight merchant -- roundtable evolution because it is so important to having those right products that are going to deliver the growth.

And it is a cross-functional team that we've had in place. But if you think about the decisions that we made a couple of weeks ago to reduce the footprint in HQ, a big part of that was around simplifying the organization so we could make decisions faster. The next step in that is to outline how we're going to work differently, clarify roles written responsibilities, clarify decision-making. That's the work the team is doing now.

And then what I'm really excited about is in adding in the automation and the technology so the team could spend less time doing the analysis and spend more time being creative coming up with those new ideas that are going to meet consumer needs and fuel growth like what we're doing in FUN 101.

To build on Rich's last point there. I think the role that technology plays -- the technology will play is going to be incredibly important across the enterprise, but a huge shout out specifically to the pace at which Pratt and team are moving. I like the acceleration of the path forward in technology. I think you can see that in some of the AI examples that we shared today, but you can also see that in some of the core foundation base that we know we have work to do to make sure our teams have all the tools at their fingertips to build the right assortment, segment in that assortment, use technology more powerfully to automate how product moves through our supply chain.

And so that continues to be a key area of focus for us. But the urgency with which we're moving that work along gives me a lot of confidence.

Our next question comes from Corey Tarlowe Jefferies. .

Great. And I wanted to ask on the level of investment that you're stepping up in the business in terms of the $5 billion for next year in CapEx. How do you think about the key levels or the key areas in which you will be investing? And then how do you think about whether or not that's the right level or if more may be needed to improve results to a greater magnitude across the business?

Yes. Great question, Corey. And I think about it in 2 ways, and this is a conversation that Jim and I have regularly with input across the team, obviously. But it's 2 things.

One is it starts with a focused strategy, investments needs to follow the path that we think drives the most growth for Target, and that starts with clarity on the strategy. And the second is we chase returns. And so the places where we're excited to step up investment are places where we expect really strong returns. That starts with investments in our stores, and those come in a couple of forms.

You've heard us talk about the strength of our new store pipeline. That pipeline continues to be as strong as ever. It's been just a delight to watch the new store openings this year, especially those bigger boxes that continue to outperform our expectations. And there's nothing more fun than walking a brand newly opened store in a market that maybe didn't have a target or didn't have a target close to that neighborhood and to see the response in the community when we open a store.

And that response is great on the faces and voices of those guests, and it's also great in terms of the incremental sales it provides and the high returns we see in those new stores. The second place where you'll see us continue to lean in is in store remodels and refreshing the existing fleet of stores. And while we've been talking about that for several years, we've been hard at work, as Brian even touched on in his opening remarks of remodeling the chain, that work isn't yet finished, and we want to make sure that we're investing in some of the stores that when we bring our latest and greatest store experience we see a reliable strong response from guests.

We continue to see strong sales lifts that justify the investment in those remodels. And so for the stores that haven't yet seen a remodel, we think it's imperative that we bring our latest and greatest thinking. That's a direct investment in the store experience itself back to the strategy. And the merchandising authority because when we do a remodel, we reallocate the space up to our latest and greatest thinking by strategy, and that helps the merchandising drive some of that sales lift.

And then importantly, technology will continue to be an area of focus for investment. We know the power of technology to help the humans and the humans that we focus on most there are obviously our guests and our team. And so wherever we can lean in and use technology. And again, it generates returns when we make things more delightful for our guests and the way technology can help with personalization on the app or help us get product to their doorstep faster and then for our team where we can allow the process-focused work of the team to get a boost from technology that frees up our store teams to better serve guests.

And so there's a lot of examples within that CapEx investment. But at its core, or does it directly support the areas of focus within the strategy and do we like the returns. And then the answer to those 2 questions is yes, you're going to see us invest.

Corey, if I can add just one more thing on top of that. When we add new stores, the added benefit for us is that we continue to build out our fulfillment footprint and capability and allows us to also expand our national digital reach as well, so that at a benefit of new stores.

Great. And then I just have a quick follow-up to Michael. On your comments on change, I just wanted to double click on that, that word specifically, and the quotient and the multitude of change that you're thinking about making as we head into 2026 and the benefits that you're seeing from lowering prices on key frequency categories. And how you're thinking about the opportunity to cut further costs potentially because we did talk about investing in agility in terms of SG&A?

So curious about how you think about the ability for the business to change today and how you're building for the future in that regard?

And Corey, if I zoom out change is going to be incredibly important. And you've heard us say quite plainly, we're not satisfied with our performance over the last few years. While the third quarter came in as expected, you're not going to get a ton of satisfaction for us until that's accompanied by the growth that comes with a positive comp. And so we've got to do the work.

There's no shortcut. And that means driving change to get different outcomes. We're starting all of that change with really clear priorities. We know how Target is best positioned to uniquely win.

And when we lead with great product, when we're design-led and differentiated and we pair that with an excellent experience, that's what's driven Target's strength in the best of times before, and we think the modern version of that can get the growth outcomes that we want. And so that does mean doing the work. That means doing the work to make changes like we are in FUN 101 to get different outcomes on the merchandising side. That means making the right investments and driving the change so that, that experience can be great in every store, every day in stores and online, but we're doing the work and a huge credit to the team that you can see the progress of that work in ways that get us excited about what's to come even within those third quarter results because we can see where we've focused and made change.

We're getting some of the outcomes that we want. And so next year, we'll be about expanding upon that to bring more of those wins across the business at greater scale.

Our next question comes from Joe Feldman with Telsey Vicari Group.

I wanted to drill in a little bit more there on some of the changes. When you're talking about the in-store changes for next year. Are there any examples you can give us? I know you mentioned there are key pads within the store maybe. I'm assuming like the FUN 101, but broadening it out, maybe you could share a few examples.

I'd be happy to share a few examples. Let me start with FUN 101 because we talk about it as a success story, and we are delivering growth, but it's just beginning. We still have more changes to make to FUN 101 to truly make that a family destination that's full of style, trend, design, pop culture. So you're going to see those changes come to life in '26. The other area that we're making some changes is in home.

Home has been a challenged business for us. We are making changes to the product to elevate the style of the product but then we're also changing the store experience to facilitate more discovery to facilitate more inspiration and really stand tall for what will be a revamped a reinvented threshold brand. So those are some of the -- we're making changes. Obviously, our contract with Ulta Beauty ends August '26. So teams are working really hard and coming up with some great ideas for how we will expand our assortment and then how we'll also elevate the experience.

We'll be able to share more specifics on that at the Financial Community Meeting. And we're making some changes in Baby. We think baby strategically is a really important category for us. We have historically done very well there.

It's an acquisition kind of category, we bring people into Target and it starts kind of along several years of loyalty as their children grow up. But we have an opportunity to make that space a little bit more inviting, a little more inspiration and also bring more gifting into it. So those are just some headlines of what we're looking at. We'll be in a much better position at financial community meeting to share more specifics on those plans.

But I got to tell you, I am really excited about these changes. And I think as we said in the prepared remarks, this is the most change we have made to the store floor pad in 10 years. So we're -- it's a lot of work, but we're really excited about it.

That's great. That was helpful. And then just a quick follow-up. With regard to the -- your Target Circle card, can you talk maybe about some opportunities there?

It feels like it's been declining the penetration of Target Circle Card, I guess, has been declining a little bit. And I'm just curious as to if you have any reasons as to why that may be and what you can do to kind of recapture some of those customers, maybe where they've gone otherwise.

Sure. I'd be happy to talk about Target Circle. What we love about Target Circle is it's huge size. It's one of the biggest loyalty programs in the country.

And now with Target Circle 360, we have a membership component to it. And what's really exciting about that is it's really helping to fuel our same-day delivery. Target Circle fueled a 35 comp growth in same-day delivery this past quarter, which is really encouraging. The conversations that we're having is now at, how do we continue to innovate and evolve on the platform. and things that we are looking at and trying or early access events with Target Circle 360. We did that this past October with Target Circle week, and it was really well received.

So we'll be doing a lot more of that this holiday season. And the last point I would make is we're really excited to have the first-party data that we get through Target Circle and be able to leverage that for personalization, particularly through this holiday season. So that will be one of the tools in the toolbox that we'll be using.

And Joe, if I can just build on the question also specifically on card. If you're referring to what you see in the results from profit sharing, we did see lower spend, a little bit lower penetration and overall lower balances in the card program. But what's important is what Rich has highlighted is that when you think about our whole loyalty program holistically across Circle 360 and the card program, and we're very pleased with the results we're seeing so far. Where we do have an opportunity, Joe, is to use where Rick started with that big base of target circle.

It's a better on-ramp to folks for whom a circle card makes a lot of sense. And so that's a place where we haven't yet achieved our potential. And so making sure that we because we can know a guest and circle so well, that means we should be positioned to know which of them at the right point in time would most like a circle part too. And we've got work to do on that front.

We haven't tapped into that to the degree that we would have hoped. And so you'll see that be an area of focus going forward for us.

Our next question comes from Mike Baker with D.A. Davidson.

I think you said -- correct me if I'm wrong, but October flat, yet you're guiding to down low single digits to the fourth quarter. Is that indicative of a little bit of a slowdown post Halloween? And I guess, as a follow-up to that, a pretty wide range in terms of EPS for the fourth quarter. Can you talk about what you're expecting in terms of margins within that fourth quarter range and how you get to the low end versus the high end, et cetera?

Yes. I'm happy to start, Mike, and Jim, feel free to add on. If you look at -- while the quarter came in where we expected it overall, we definitely did see volatility by month in Q3. And so that factors in to how we're thinking about our expectations, but we feel good that we've got the business positioned well heading into fourth quarter. We feel like our top line and bottom line guidance is prudent based on the volatility that we saw in Q3. And we start the quarter in a really good place, something we haven't unpacked as much yet.

So I'll touch on it briefly is that inventory is in a great place as we step into the fourth quarter. on the balance sheet, it's down 2%. It's up in our frequency categories, which makes sense given the investments that we're making there and stronger inventory reliability and in-stocks and it's appropriately down, I think, in an appropriately cautious position in the discretionary categories. And so we start the quarter where we would want to be positioned from an inventory perspective, and we feel like it's the prudent place to be. Jim, feel free to add as we're thinking about profit for the fourth quarter or how we've reflected Q3 trends into that view.

Yes, Mike. And if I build up on that, I mean if you take a step back and look at Q3, obviously, we faced a pretty dynamic environment. And as our gross margins and percentage-wise was broadly flat, we're pleased with the performance, and that's in line with expectations and a big thank you to the team to manage and navigate and move quickly with agility to meet the needs of consumers and understand where things are heading. We expect that dynamic to continue in Q4. We do expect a continued volatile environment, which is why there's a little bit still, I guess, a wider range in place because we want to make sure we are -- we have the ability to react quickly to change this new environment that will represent the range that we're looking at.

Only build I might have, and Rick, feel free to chime in here as -- we don't have a perfect crystal ball for exactly how it's going to play out by day or by week in Q4. But the thing we feel really good about is how we'll show up for the guests. You've -- we've touched a little bit on some of the questions on making sure that we meet the guests where they're at. And for us, that's always a couple of things because there's a couple of ingredients of how guests view value. It's the combination of great prices, and you heard us invest in 3,000 price cuts across Food & Beverage and Essentials we're really excited about a Thanksgiving meal for 4 under $20 as we step into Thanksgiving here right around the corner.

And for Target, it's also pairing that great price with incredible product. And so I'm just as excited about the 20,000 new items that we'll have this coming fourth quarter, twice as many as last year as I am about the great pricing guests will find on those items. And so it's that combination for us that matters so much. And on that front, we feel really good about what guests are going to find as they travel the site and the store and the holiday season.

Our next question comes from Kate McShane with Goldman Sachs.

We wanted to drill down a little bit more on your commentary around inventory and in stocks. Is there any way you can kind of talk to how you feel about the inventory position going into holiday, how it looks versus last year? And just how you see the cadence of in-stocks improving over time.

Yes, Kate, as I think about inventory broadly, we touched on a little bit of that, and Mike's question a second ago, but I do think it's important to spend a moment on in-stocks. And I would expect because being in stock matters so much to our guests, that's a topic you see us come back to over and over and over again in all of these earnings calls to come because it matters so much. If you've trusted us with a trip to the store, we can't let you down by being out of stock and we haven't been good enough over the last several years on that front. And so we're laser focused on improving that.

And a huge credit to the team for the progress that we've seen so far. I can dimensionalize that just a little bit more here in a second. But I also want to emphasize that work is not done. The bar for the consumer for our guests is higher than ever before on that front.

And so you're going to see us continue to lean in to make progress over time. Where we've started is with a really acute focus on those most frequently purchased items, where if we're out of stock, it hurts more, if you're a guess, and we've let you down. And so you heard in my remarks, the focus on our top items. So think of those as the 5,000 most frequently purchased items.

They account for about 30% of our unit sales. And so a big piece of what guests are finding and buying every day at Target. And as the team has leaned in to make progress on that subset of items, it comes in a whole bunch of ways. It comes with embracing the use of technology to help us forecast better and being more in stock that way.

It comes with us having a better view of how we're really performing. We've described it before. We've changed some of the measures we use for in-stocks that give us a clearer mirror than ever before where we're doing great and where we're falling down. And that's been really helpful because it's told us Okay, we might be okay on average in some places, but we're not good enough at the end of the day or we have a shortfall on weekends that we need to address.

And so teams have been hard at work in moving the needle there. And on the measures that we move, you heard me describe a 150 basis point improvement in Q3. If you're not close to the work, it's maybe tough to appreciate how big that progress is. But what I like is that better year-over-year improvement in Q3, performance versus last year than we saw in Q2, which was better than we saw in Q1. And that trajectory gets me really excited that we're doing the right work to get a different outcome. And if we can keep that progress up and I have a ton of confidence that, that's exactly what we'll do.

We'll be more and more in stock as we move through 2026 than we were in 2025.

Our last question will come from Michael Lasser with UBS.

You just outlined a lot of the progress that you're making on key operational metrics such as in-stocks and speed to market, yet we really haven't seen it trend ally to an overall improvement in the performance of the business. So the obvious question is, why not? And what -- as outsiders, is a reasonable time frame for holding the team accountable for showing that progress?

Yes. Thanks for the question, Michael. Here's what I'd say. We're not satisfied with the top line performance of the business, even as it's come in as we expected in Q3. And so we're doing the work with urgency.

As a team, our focus is to get back to growth. And we know that won't happen overnight, but we know what the path is. We're focused on making progress. We see momentum where we're making that investment a huge credit to the team to do the work that's going to get that outcome over time.

And so we'll unpack more what our expectations for next year look like when we get to the financial community meeting in March. But I feel really good that we've got a team focused on doing the work now that will lead to growth over time. And rest assured, we are tackling that work with urgency.

Okay. My follow-up question is -- if I could just add one more on...

Go ahead.

Very much, Michael. I appreciate it. And I will add my best wishes to Brian. You've already outlined the $1 billion of incremental for next year, perhaps there might be some incremental operating investments that could take down the profitability a bit next year.

How amongst those guardrails are you thinking about the commitment to the dividend and the importance of that to your certain shareholders moving forward?

Well, and Jim, feel free to pile on to this one if you'd like. You've heard us describe our support and strong support over time of the dividend, Michael, you shouldn't expect anything to change there. We've been consistent in our capital priorities for as far back as I can remember in my 23 years here. And it starts with making the right investments in the business.

The $5 billion we'll put to work next year. We're really excited. We'll generate the returns and the growth that warrant that level of investment. The dividend is always the second priority, and I think our track record speaks for itself in terms of our support of the dividend and share repurchases with what's left piece that we'll always adjust as appropriate, but the dividend sits second in that priority list for a reason.

Thanks, Michael. That brings us to the end of today's call. Thanks, everyone, for your questions and engagement.